Market Recap: Tuesday, December 28

The S&P 500 took a breather on Tuesday, closing out a choppy trading session in the red after the index ceased a four-day climb toward another all-time high. Matt Orton, Carillon Tower Advisers Chief Strategist and Boris Revsin, Republic’s Executive VP and Head of Republic Capital joined Yahoo Finance Live to discuss.

Video Transcript

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BRIAN CHEUNG: Welcome back to "Yahoo Finance Live." We're awaiting the buzzer on market activity on this Tuesday, December 28. If you take a look at markets, again, as Jared was describing earlier, mixed bag across the board. The Dow in the positive. The S&P 500 and the NASDAQ in the red, although there were brief moments where all three were trading in the positive. Again, light volume as is normally the case on the final week of trading in a given year. But it seems like no sign of a Santa Claus rally, at least for this Tuesday-- although, of course, yesterday, we did have some pretty impressive gains.

But we do have a panel. Matt Orton, Carillon Tower Advisors chief strategist, as well as Boris Rosen, Republic's executive VP and head of Republic Capital on the other side of the bell, which is happening right now. It looks like the-- what is it-- the New Era Pinstripe Bowl is ringing in the closing bell, at least on the New York Stock Exchange. By the way, Syracuse did win the Pinstripe Bowl a few years back. I think it was against West Virginia.

But let's stay with the topic of the markets here. And Adam, you're going to take us out, right?

ADAM SHAPIRO: Keep going, Brian. We got a bell. Anita Ward said it best in 1949. You can ring my bell. Let's get to the panel. And let's start with Matt. When we take a look at where we're heading, not a big selloff today, especially if you're looking at the S&P 500. NASDAQ off about half a percent. How are we setting up, do you think, for the first half of 2022?

MATT ORTON: Hey, Adam. It's great to be back. And I think it's a backdrop of optimism. We had some pretty negative sentiment earlier in the month, and we've had a couple of good days and good sessions over the last week. And today's, I think, more of a function of just a lack of volume and a lack of catalysts more than any sort of change in sentiment. But overall, I'm very, very optimistic for where we can go next year. We have a strong economic backdrop moving into 2022.

And most importantly, and what I really emphasize to our clients, is that you have to consider earnings growth. And certainly, earnings growth is going to slow down from some of the optically high levels that we had earlier this year. But overall, the levels of earnings growth are going to remain very, very strong, and they're going to be positive-- upper single digits, lower double digits for most likely the duration of 2022. And that sets up very positively for the equity markets going forward.

BRIAN CHEUNG: Well, let me go to Boris on this one. Because it seems like with the S&P 500 closing just barely in the red, didn't hit another closing-day high, although we know the trend of the S&P 500 over the course of 2021. Now, on one hand, does that suggest that you should stay passive heading into 2022? Because we did have a guest yesterday who said, actually, this might be a warning sign that passive investors could be in for some hurt, especially as the Fed starts to normalize policy next year.

BORIS REVSIN: Well, look, like you said, the S&P has outperformed the NASDAQ this year. And I do think that this could be the beginning of some folks looking towards value stocks and fundamentals. But I do think the early parts of 2022 is going to be a mix of two narratives. You have the speculative narrative-- retail, meme stocks, cryptocurrency, stimulus. And I think you're going to start to see those brands cater more to their retail investors.

At the same time, led by this S&P outperformance, it is going to be hard for growth stocks in the NASDAQ to beat earnings in 2021. And as we've seen, forward projections, if they're not up to snuff, what investors are expecting-- you can take a big hit, an outsize hit. So while we are bullish for the first two quarters of '22, we are looking to see how those earnings and forward-looking statements for the next quarter come out.

ADAM SHAPIRO: Boris, I want to double down on what you're saying here. Because at the end of the day, I think the question all of us as investors have is, how are we going to make money next year? And what you're telling us-- can you put that into-- is there a sector? Is it small cap that you would have? Many of us are passive investors who may have to realize that it's time to become active in what we're picking. Where would you direct us?

BORIS REVSIN: Well, the world is thirsty for yield. And so I think in absence of major rates changes, what we're going to probably see is a move towards small caps with active investing. And you're seeing some of that play out on Reddit forums and Twitter. You're also seeing that play out in the private markets.

We operate quite a bit in those markets. And we're seeing large inflows all the way from institutions to family offices and also to crowdfunding, which is one of the pillars of our business. And you are seeing capital inflows as people want to do their own research. They want to make their own investing decisions. And I think some of the institutions are starting to catch on to that. And perhaps you're going to see some institutions follow some retail.

BRIAN CHEUNG: Now, I want to direct this question over to you, Matt, in terms of where to look right now. I mean, kind of similar question. There are certain pockets that you like. It might even be sorted out by size. We were just showing the Russell 2000, which has had an interesting path over 2021 as well.

MATT ORTON: Yeah, Brian, I really want to like small caps, but I think there's still some challenges going forward. Like Boris had mentioned, small caps likely present a great opportunity for active management, for actually picking stocks. And one of the big themes that I've been talking to our clients about is leaning into quality, quality growth for next year. So stability in both your top-line and bottom-line growth is going to be really, really important.

But the challenge that you have down the market cap spectrum-- and I think that's particularly been an issue for the Russell 2000 this past year-- is concentration. Over 50% of the Russell 2000 sits in information technology and health care. And most of that weight in health care is biotech. And when you think of what perhaps the highest-duration asset is out there, it's small-cap biotechnology, which I kind of jokingly say are publicly funded science projects in many cases.

And with a rising-rate environment, it becomes a little bit more of a challenge for that space to work. And that's really been the reason why you've seen small caps, and small cap growth in particular, really lag the broader marketplace over the past year. So when we think of what's going to look attractive in 2022, I think large caps and mid caps still are the place to be over small caps. If you can start to see areas of small caps like health care and technology work better, I think it becomes a little bit more attractive, because they are trading historically cheap relative to the rest of the market.

And then if we dig a little bit further with the mid and large space, I still really like information technology. I think it was back in May, I was talking with Adam and Jared about how much I still liked information technology. And the narrative really hasn't changed. We've largely been avoiding some of the most speculative, highset-valuation names and favoring this quality growth themes, names that have high visibility with respect to their earnings and have both cyclical and secular elements to their business models. And that fits a lot of the big five. And health care as well has broadly lagged the market this year.

But talk about a place where there's natural growth. With an aging population and 25% or so of GDP being spent on health care, that's an attractive piece of the market that looks good from a valuation perspective. And health care technology, equipment, and services, those are all good areas, we think, going into 2022.

ADAM SHAPIRO: Boris, what do you think of that? And I'm going to zero in on the health care side of that. Because health care as a part of GDP-- I think the latest numbers-- and I forget the source, but it was a government source-- I mean, it's going to be a huge trillions and trillions of dollars of GDP going to health care. We can have an argument about whether that's appropriate or not. But wouldn't you want to get in on that now?

BORIS REVSIN: I think that right now, there is a huge amount of pent-up demand for investing in growth narratives. And I think that health care, for reasons of COVID, for reasons of inflation-- because of technology behind some of these health stocks, there's a lot of pent-up demand. So I agree with you. That's a good place to look, especially if you're looking to be more of a passive investor in some of the larger caps.

I think on the small caps, there's a large amount of risk if you're trying to pick the right winners with binary outcomes. And so what I would say in those regards is, you really want to look to some of the indexes and some of the funds and get some help making some of those decisions. But health care is going to continue to be a major small-cap and large-cap theme throughout 2022 and probably 2023.

BRIAN CHEUNG: Boris, one more for you. I mean, just broad volatility, what do you see as the big story in 2022? Because a lot of people are saying Fed policy could be a source of uncertainty. God knows if there's going to be another variant coming down the pike. Should we expect 1,000-point days on the Dow frequently next year?

BORIS REVSIN: Well, I don't think you need to be a doctor to expect a further variant. I do think that the broader public is becoming more educated about what that means. And I think the media is starting to get some things right in talking about vaccines but also preventative care, and also, of course, with the FDA approving some of these new treatments. Ultimately, I think that we are going to get some large swings in 2022. But I think the context for those larger swings is less likely to be COVID and likely to be more centered around inflation and different changes in the rates.

Ultimately, I think that it's going to be very hard to time those black-swan moves. And so for us, the way that we're thinking about it is broadly, technology, deep tech, fintech, cryptocurrency. There are a lot of headwinds for those sectors, and that's where we're doubling down.

ADAM SHAPIRO: Matt, I took a second, and I looked it up. It's the Centers for Medicare and Medicaid Services national health expenditures this year-- $4.2 trillion. In just six years, it's going to be $6.2 trillion. I understand casting a big net, looking at small cap, that might benefit of that. But I've got to believe that the larger health care companies are just going to gobble up the smaller companies. If that's my assumption, how do you then turn that into a strategy going forward over the next couple of years with purchasing equities?

MATT ORTON: It's a great point. When you look down the market cap spectrum, you do see a lot of acquisition, particularly in small-cap health care companies. And a lot of it tends to be in biotechnology because those names are acquired by larger-cap pharmaceuticals that have patent cliffs, pipeline issues with drugs. But just like you said, you can't build a strategy around that. I think that's why it makes sense to have exposure to small caps and to have exposure to active managers that can pick the best names in the space.

But when you look up the market cap at health care, I think you really have to look at where the most innovation is and where you have the most leverage to the growth story. And so to the point of the extreme spend that we have on health care, a lot of that goes to the aging population and the growth in chronic diseases that we have within the population. So companies that have exposure to diabetes, to heart issues, companies that make the medical devices and equipment that service the management of those diseases, that is a great growth area in the economy. And those companies have done well. And I expect them to continue doing well going forward.

And when you also look at exposure to potential regulatory risks, that's not really on the radar right now as we head into an election year. But a lot of the companies that serve these chronic diseases don't have that much exposure because it's covered by private insurance and Medicare and Medicaid. And so you have less of a regulatory threat there. So that's one of the reasons why I'm so optimistic on health care, and particularly larger and mid-cap health care companies that have these diversified business models.

BRIAN CHEUNG: All right. Thanks so much to our esteemed panel-- Matt Orton, Carillon Tower Advisors chief strategist, alongside Boris Revsin, Republic's executive VP and head of Republic Capital.